United Technologies Reaches Agreement With Rockwell Collins On $30 Billion Acquisition

Over the weekend, United Technologies (NYSE: UTX) managed to close the much awaited acquisition deal with aircraft parts manufacturer Rockwell Collins for nearly $30 billion, which includes $7 billion in net debt. The deal enables UTC to benefit from operating synergies through lower costs, with more opportunities to cross-sell each company’s products. Such benefits are expected to make the company a significantly more important supplier of components to mammoth aircraft manufacturers like Boeing and Airbus, thereby increasing its bargaining power in the aerospace supplier market.

United Technologies has agreed to pay out about $140 a share in the merger. Per the agreement, each Rockwell Collins shareholder will get about $93.33 per share in cash, and the remainder in UTC common stock. The company hopes to fund the cash portion of the transaction partially through debt and the balance through cash on hand. We can expect the transaction to close by Q3 2018, subject to approval of Rockwell Collins’ shareholders and other regulatory bodies.

Under the deal, Rockwell Collins and UTC’s Aerospace Systems segment will be combined to create a new business unit named Collins Aerospace Systems. The combined entity is expected to see many benefits. If all goes to plan, United Tech could see over $530 million in annual savings as early as year 4. Additionally, on a pro forma basis, the company is expected to see close to $23 billion in aerospace sales in 2017 alone.

As mentioned previously, the combined size of the company is expected to increase its overall bargaining power in the market. To put this into perspective, in July, Boeing announced its intention to set up a factory unit tasked with producing avionics and electronic systems, similar to the products UTC and Rockwell make. Such a move was bound to hurt sales and operating margins at the major aeronautic suppliers. That said, a quick and decisive merger between the two companies would help UTC resist such pressures from larger competitors that have the potential to use their resources to grab large swaths of market share.

All in all, a deal such as this has the potential to turn things around for UTC, which has seen a modest recovery from a tough business climate. We can expect to learn more about this deal in the coming few days.

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